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Litigation Holds are for More Than Litigation

Don’t Be Surprised By Litigation Holds

There is a lot of buzz in the legal industry about the importance of eDiscovery and litigation holds in litigation.  Nearly daily, attorneys are reminded to issue litigation holds when litigation is reasonably anticipated.  It’s taken a while, but collectively, us as attorneys are starting to get it.  We are working with our clients to develop and roll out litigation hold policies and practices that are targeted in scope and help ensure litigation holds are reaching the right record custodians.

That said, eDiscovery obligations and litigation holds (unlike their names imply) are not limited to litigation.  We were recently reminded of this by Judge Alsup of the Northern District of California in ILWMU-PMA Welfare Plan Board of Trustees, et al. v Connecticut General Life Insurance Co., et al., 3:15-cv-02965-WHA [Dkt. 110] January 24, 2017.  In ILWMU, the defendant, Carewise Health, Inc., was sanctioned for failing to preserve ESI which was transferred to a third party in the context of the sale of a business.  Specifically, Carewise entered into a tolling agreement with the plaintiffs in March of 2011 in relation to potential claims between the parties.  This tolling agreement was extended eleven times through April of 2015. 

By way of background, Carewise is part of a parent company, formerly named SHPS, Inc.  SHPS owned three separate subsidiaries, two of which were at play in the Court’s order, SHPS Health Management Solutions, Inc. (the former name of Carewise) (“HMS”) and Human Resources Solutions, Inc. (“HRS”).  HRS was acquired by ADP, Inc. in 2012.  During the course of that transaction, ADP acquired HRS’ servers that contained electronically stored information (“ESI”) for HMS.  At the time of the sale, HMS had a policy to retain ESI for eight years.  The sales agreement contained two clauses relating to ESI, one stating that the parties would “retain each others’ business information” and another stating “until the sixth anniversary of the agreement, [a party would] not destroy any such information without first notifying the other party and giving it a reasonable opportunity to take possession, at its own expense, of the information to be destroyed.”

Plaintiffs commenced this litigation on June 25, 2015 and sent discovery requests to Carewise in February 2016.  The February 2016 discovery sought documents including ESI contained on the sold servers.  Carewise did not reach out to ADP about the discovery until October or November of 2016.  Despite the record retention requirement from HMS, ADP stated that it did not have any ESI from prior to 2009 and the email box for one of the central custodians was not available.

The plaintiffs sought sanctions against Carewise in relation to their discovery failures.  The Court’s analysis focused on when Carewise’s duty to preserve arose and what steps were taken to preserve relevant ESI.  With regards to the duty to preserve, the Court found Carewise’s argument that its duty to preserve was not in place at the time of HRS’s sale to ADP unconvincing.  Specifically, the Court stated that “this litigation, however, was reasonably foreseeable by March 2011 when both plaintiffs and Carewise entered into the tolling agreement.”

How Carewise Argued and Lost

Carewise pushed back on this standard and stated that it “could not have known if the plaintiffs would sue, whom they would sue, if anyone, amongst the multiple parties to the tolling agreement, when they might sue, what claims they might bring against which parties, and what documents over what time period might be relevant to unspecified hypothetical claims that may or may not be made against unspecified parties at some unknown point in the future.”  The Court rejected this argument, stating, “this hand-wringing over the minutiae of potential litigation is a red herring.”

In its reasonable steps portion of the analysis, the Court also rejected Carewise’s reliance on the sales agreement as its sole means of preservation.  The Court was perplexed by the “inexplicable” fact that Carewise’s ESI was stored on a server transferred to a third party as part of a sale of HRS, a separate company from HMS.  The Court found that Carewise did not take reasonable steps to preserve relevant ESI.

Interestingly, the Court declined to find that “it is per se unreasonable for a party with a duty to preserve to fail to make any copies of [ESI] before selling the systems and servers on which such [information] is housed and to depend solely on a third party to retain and preserve such [information].”  The Court instead relied on the language of the sales agreement and Carewise’s failure to promptly inquire with ADP regarding the information as its bases for sanctioning Carewise.

What should you get from this?

Namely, that it is crucial to investigate all tolling agreements and litigation holds when selling a business or a portion of a business.  Further, companies cannot merely rely on the language of their sales agreements in fulfilling obligations relating to eDiscovery. Companies must actively participate in identifying data sources and in collecting relevant ESI.  Ultimately, a comprehensive Information Governance strategy is key to being ready to comply with eDiscovery requirements, whether for litigation, per the requirements of a contract, or just because it is good business practice. This is another wakeup call for corporate counsel, law firms and the entire legal community, that preservation of ESI is as vital to their viability as a business as it is to their ability to produce responsive documents and screen privileged information during Discovery. The more challenges associated with eDiscovery are embraced as opportunities, the better prepared lawyers will be to deal with data collection and document review during a potential litigation. Whether you need to partner with a reputable firm that can help you design, create and implement an Information Governance model that fits your specific needs, or form an internal team to achieve these goals, an in-depth and systematic blueprint must be present to avoid being found in violation just like Carewise.

You can find the full opinion here – Welfare v. CT General Life Order on Motion for Sanctions.

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